ArthaYantra Buy vs. Rent Score (ABRS)-Chennai

ArthaYantra
A CFO FOR EVERYONE

BUY VS. RENT
A PERSONAL FINANCE PERSPECTIVE

Chennai Edition
Buy Rent

Copyright 2012
C
www.arthayantra.com

Table of Contents

Summary 3
1. Introduction 6
2. Methodology 7
3. Assumptions 8
4. Findings
4.1 Historical data of Real estate prices 9
4.2 Property Cost vs Rental Value 10
4.3 Down Payment 12
4.4 Area 13
4.5 Rent to Buy Ratio 14
4.6 Break Even Horizon 15
5 ArthaYantra Buy vs Rent Score (ABRSTM) 17
6. Other Important Numbers 20
7. Conclusion 21
8. Limitations and Concerns 21
9. Appendix 22

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www.arthayantra.com

BUY VS. RENT: A PERSONAL FINANCE PERSPECTIVE

Summary
Property cost vs Rental Value: The Residential Property prices in Old Mahabalipuram and
Porur are not being translated to their rental value. Though the average residential
property values of Tambaram is higher than Old Mahabalipuram Road by 16%, the
average rental value is less by nearly 32%. The same case goes with Chromepet and Porur.
Though their average residential property values are identical, their average rental values
differ by nearly 32%.

Down payment: The years of saving required to afford the initial down payment i.e. 20% of
the property price determines how sooner we can buy a house. It takes at least 4 years to
save for the required corpus in Medavakkam, Tambaram, Porur, Kolathur, Chromepet and
Old Mahabalipuram Road. In Sholinganallur and Perambur it takes 5 years, in Ashok Nagar
it takes 7 years and in T. Nagar it takes 8 years. In Anna Nagar and Adyar a professional has
to save for at least 9 years to afford the down payment amount required. In Chetpet it
takes 10 years to save for a house.

Area: The average number of square feet per INR 1 lakh determines the amount you need
to pay for the desired area of occupancy. The average number of sq ft of 28.90 per INR 1
lakh in Old Mahabalipuram Road makes it the place where you can get the highest area
for the same amount of money compared to other 11 localities. This implies that for a given
price one can get the largest space in Old Mahabalipuram Road followed by Tambaram,
Medavakkam, Porur, Chromepet, Kolathur, Sholinganallur, Perambur, Ashok Nagar, T.
Nagar and Anna Nagar. Adyar and Chetpet offer the least in terms of space.

Rent to Buy Ratio: The ratio compares the monthly cost of renting house to the monthly cost
of owning the same place. The ratio undermines the necessity and urgency with which the
house has to be bought. The rent to buy ratio of 0.52 shows that the rental values in Old
Mahabalipuram Road are higher and makes it an “immediately buy when you can afford”
place. The ratio of 0.32 in Tambaram gives ownership of house an advantage over renting.

Annual out of Pocket Costs: The annual out of pocket costs in case of ownership include the
monthly EMI being paid including the maintenance charges and the amount of tax being
paid. The values have been calculated and compared across the average loan tenure of
15 years. The year at which the annual costs match determines the minimum stay period in
the house. The minimum stay period is 9 years for Old Mahabalipuram Road, 15 for
Tambaram, Medavakkam and Chromepet and above 15 years for T. Nagar,
Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar.
The tax beneﬁts received under the HRA allowance dominate the tax beneﬁts received in
case of ownership over the period of 15years.

ArthaYantra Buy vs Rent Score: ArthaYantra Buy vs. Rent Score (ABRS) not only aids in
making the rent vs. Buy decision but also explains the affordability and need to buy or rent
in a given place. The three important factors on which scale is based are: affordability to
rent, affordability to buy and a comparison of rent and EMI.

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Adyar: The second highest in terms of average property prices. The rent to buy ratio of 0.2
meant that the average rental value of residential property is very less compared to its
higher prices. Renting is the best option.

Anna Nagar: A rent to buy ratio of 0.20 and high property prices makes it a place to Rent.

Ashok Nagar: A rent to buy ratio of 0.26 and moderately high property prices makes it a
place to Rent.

Chetpet: The place with highest average rental value and average property price. The rent
to buy ratio of 0.24 meant that the rental prices are high and it is advisable to buy. But the
higher property prices and least number of sq ft per INR 1 lakh (among the thirteen
localities) makes it a place to rent.

Chromepet: The rent to buy ratio of 0.31 meant that the rental prices are moderately high
and it is advisable to buy. The number of years required in order to save for down payment
(4 years, which is least among the twelve localities) and the property prices being in an
affordable range make it an affordable locality.

Kolathur: A rent to buy ratio of 0.27 and moderately high property prices makes it a place to
Rent.

Medavakkam: The rent to buy ratio of 0.32 meant that the rental prices are moderately
high and it is advisable to buy. The years required to save for down payment (4 years, which
is least among the twelve localities) and the property prices being in an affordable range
makes it the third most affordable locality (out of the thirteen).

Old Mahabalipuram Road: The rent to buy ratio of 0.52 meant that the average rental
value of residential property is high compared to the average property price. This makes
Old Mahabalipuram Road a place to buy. The moderate prices and decent number of sq
ft per INR 1 lakh make it a place where in you need to buy a house as soon as you can afford
it. The out of pocket costs also in favor of buy with the breakeven being achieved at 9th year
(fastest of the thirteen localities).

Perambur: The rent to buy ratio of 0.24 meant that the rental prices are high and it is
advisable to buy. But the higher property prices makes it a place to rent.

Porur: The rent to buy ratio of 0.22 meant that the average rental value of residential
property is very less compared to its higher prices. Renting is the best option.

Sholinganallur: A rent to buy ratio of 0.27 and moderately high property prices makes it a
place to Rent

T. Nagar: A rent to buy ratio 0f 0.28 meant that the rental values are high but the property
prices are higher. Therefore it is advised to rent.

Tambaram: The rent to buy ratio of 0.32 meant that the rental prices are moderately high
and it is advisable to buy. The years required to save for down payment (4 years, which is
least among the thirteen localities) and the property prices being in an affordable range
makes it the second most affordable locality (out of the thirteen).

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Buy Vs. Rent in Chennai

Place Salary range ABRS Score Sq feet No of Years
Place Lacs ( ) per Lac ( ) to Buy
(1000 Sq feet)

Old 8-9 75
Mahabalipuram
Road
10 - 11
12 - 25
87.5
100
28.90 4
8-9 65
Tambaram
10 - 14
15 - 25
77.5
90
25 4
8 - 11 55
Porur
12 - 14
15 - 25
67.5
80
23.81 4
Medavakkam
8 - 11 65
12 - 14
15 - 25
77.5
90
23.81 4
8 - 11 65
Chromepet
12 - 14
15 - 25
77.5
90
23.65 4
8 - 11 55
Kolathur
12 - 14
15 - 25
67.5
80
23.33 4
8 - 11 55
Sholinganallur 12 - 19
20 - 25
67.5
80
21.05 5
8 - 14 55
Perambur
15 - 19
20 - 25
67.5
80
18.27 5
Ashok 8 - 20 55
Nagar 21 - 25 67.5 11.71 7
T Nagar
8 - 25 55 9.85 8
Anna
Nagar 8 - 25 55 8.70 9
55
Adyar 8 - 25 7.69 9
8-9 30
Chetpet 10 - 25 55 6.85 10

RENT NEUTRAL BUY
Figure 1: Graphical Representation of Buy Vs. Rent in Chennai

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1. Introduction
Buying a home is one of the most important decisions in one's life. It is a tough decision to
make and emotions cloud the decision making process. Often buying a home is given a
high weightage by our family, friends and society at large. People associate the
advantages of housing security, physical asset creation and property appreciation with
home ownership. Renting is associated with expenditure. However, renting on the other
hand gives flexible lifestyle options, high level of mobility and is easy on the purse when
compared to the EMI to be paid.

From a personal finance perspective there is always a tussle between buying a home and
renting it. Is it prudent to buy? Is there an upside to taking a place on rent? How the lifestyle is
going to be affected? What is the impact of the locality chosen? There are numerous other
Questions that crop up when this topic is discussed. This research paper tries to find the
answers for these questions. As a part of this research we aim to objectively address the
major factors which impact the decision of buying or renting.

The common assumption that the residential property always appreciates is inconsistent.
The appreciation of a residential property is dependent on several factors. So one can't
actually determine the rate at which the residential property is going to appreciate or
depreciate. A school of thought supporting the rent argument says the amount invested in
a home when invested in equities for the common horizon of 15 years, yields the same or
better rewards. The real estate market scenario is similar to that of equity markets because it
is unpredictable.

The other common assumption held is buying a home eventually results in increased tax
savings. But provided the fact that the EMI payments accounting for principal payment of
home loan come under the same section as Provident fund and required risk cover for self
and family, one can't enjoy major tax benefits under section 80C. The tax benefits received
under section 24B i.e. the interest payments made towards house loan can be matched up
with HRA allowance in case of renting. So a professional shouldn't base the decision of
buying a house on the tax savings he/she is going to receive.

So eventually the three factors which play a predominant role in making the decision are:
Current Property price which determines the EMI to be paid, current monthly Rental value
and the current gross income. Monthly rent or the EMI being paid shouldn't end up
consuming most of the salary which in turn affects the lifestyle. It is not a good financial
decision to buy if the rental value is low compared to the EMI to be paid in case of
ownership.

As a part of this research we aim to provide a quantitative answer to the question of buying
vs. renting a home. We analyzed the costs associated with owning a house and renting a
house across thirteen localities in Chennai: Adyar, Anna Nagar, Ashok Nagar, Chetpet,
Chromepet, Kolathur, Medavakkam, Old Mahabalipuram Road, Perambur, Porur,
Sholinganallur, T. Nagar and Tambaram.

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2. Methodology
Property prices and rental prices of various residential properties were collected from
multiple data sources to generate the primary and secondary data for the analysis. The
public data sources including the data by National Housing Board (NHB) of India, data
from various real estate reports and data from major real estate aggregators is collated.
The primary research has been performed by collating information from over 100 real
estate agents across the localities considered.

The methodology used for arriving at results considers various key parameters derived from
the initial data collected: Price of the residential property and their rental value. Various
important factors like the years of saving required for a professional to accumulate the
corpus for down payment and the number of square feet per INR 1 lakh are derived from
the average property price.

The main idea behind this research was to quantify the buy vs. rent decision from a personal
ﬁnance perspective. The main factors which drive the decision are: how much more
money does a professional need to shell out for buying a home compared to renting it?
Can the professional afford this additional amount? ArthaYantra's Buy vs. Rent Score tries to
address these questions and come up with a comprehensive scoring system. The scoring
system not only tells whether it's better to buy or rent but also tells whether it's affordable to
buy or rent.

Factors associated with buying a home Factors associated with renting a home

Down payment for home loan Security Deposit

No. of Years required to save for down Monthly Rent
payment
EMI on home loan Yearly increase in rent

Monthly property maintenance charges Monthly property maintenance charges

Annual repairs Income tax savings under HRA exemption

Annual property tax

Income tax savings under section 80c and
24 b

Table 1: Factors associated with home ownership and renting

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3. Assumptions
 The sale price and rental values are calculated for 1000 sq ft area ready to occupy
residential property.

 20% of the cost of the house is considered as the required down payment to buy a
house.

 The loan tenure is 15 years.

 The lending rate for the loan is 10.50%.

 Average savings rate is 25%.

 The minimum gross income required to buy a house is calculated by considering
50%of monthly take home salary= Monthly EMI to be paid.

 The gross income of the professional increases 10% annually.

 1.5% of the property value is considered as the property tax to be paid.

 10% annual increase in rent is considered.

 Property appreciation is not considered.

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4. Findings

4.1 Historical data of Real estate prices

National Housing Board India's Residential Index (NHB Residex) tracks the movement of
prices in the different zones of the city. Figure 1 shows the historical NHB Residex values since
its inception in 2007.

NHB Residex of Chennai

700 Zone 1
600 Zone 2
500
400 Zone 3
300 Zone 4
200
Zone 5
100
Zone 6
de
x
de
x
de
x
de
x
de
x
de
x
de
x
de
x
de
x
de
x
de
x Zone 7
In In In In In In In In In In In
07 10 10 10 10 01
1
01
1
01
1
01
1 12 12 Zone 8
20 20 20 20 20 2 2 2 2 20 20
ar n e p ec ar un e p ec ar p
-M r-J
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-S t-D -M r-J l-S t-D -M r- Se Zone 9
n n n n
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Zone 10

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Chennai as a city has recorded a raise of 209% when compared to the base year of 2007.
Zone 4 has recorded the highest raise in index value by 538%. Zones 5 and 8 have followed
up with a 530% and 464% raise respectively. All the other zones have also recorded a
minimum raise of 80% and a maximum raise of 253% when compared to their base year.
Some zones have performed better than the city while other zones have not done as well
as the city. Porur falls under Zone1, Perambur under Zone 3 and Kolathur under Zone 4.
Anna Nagar and Chetpet fall under Zones 5 and 7 respectively. Ashok Nagar falls under
Zone 8, Chromepet under Zone 9 and Adyar under Zone 10.

It is evident that each of the zones has different real estate market and different
expectations from real estate. The effort is to identify the places that are most affordable
for a professional, given the current scenario. It is important to look at these graphs to get a
high level perspective of the general movement of real estate in each of the zones. We
delve into each zone's prospect in the later sections. The relative nature of the index hides
many interesting facts.

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4.2 Property cost Vs. Rental Value
The graph compares the property price and rental value of 1000 sq ft ready to occupy
house across thirteen localities of Chennai. The bar graph depicts the average property
price in the locality and the line graph depicts the average rental value in the locality.

Comparisons of Average Rents and Average Property Prices

Rs. 16,000,000.00 Rs. 35,000,000
Rs. 14,000,000.00 Rs. 30,000,000
Rs. 12,000,000.00 Rs. 25,000,000
Rs. 10,000,000.00
Rs. 8,000,000.00 Rs. 20,000,000
Rs. 6,000,000.00 Rs. 15,000,000
Rs. 4,000,000.00 Rs. 10,000,000
Rs. 2,000,000.00
Rs. 0.00 Rs. 5,000,000
Rs. 0.00
d m m r et ur r r ar ar ar r et
oa ra ka ru llu bu ya
Po ep th a ag ag ag Ad
tp
R ba va
k
om ol
a an am N N N he
am m a hr K g r k T. na C
ur Ta ed lin Pe ho
C o As An
al
ip M Sh
ab
ah
M
ld
O Locality
Average Price of Residen alProperty Average Rental Value

Figure 3: Average property price and rental values across thirteen major localities of Chennai.

The most important thing that strikes out while assessing the current residential property
prices and NHB Residex is the base effect. Anna Nagar's property prices (INR 11,500,000) as
per NHB Residex have grown six fold but still remain similar to property prices of Adyar (INR
13,000,000). Kolathur whose property prices (INR 4,286,500) grew 538% as per NHB Residex
are identical with that of Chromepet (INR 4,229,000) which recorded a growth of only 200%
in its index value. This means that the property prices of Anna Nagar and Kolathur in the
base year 2007 were less compared to other localities.

The most important factor that stands out from the rental value of the properties across the
thirteen localities is the anomaly of the property values not being translated to the
corresponding rental values. Old Mahabalipuram Road's average property price (INR
3,460,000) is less than that of Tambaram (INR 4,000,000) by 16%. But the Average rental
value of Old Mahabalipuram Road (INR 15,500) is higher than that of Tambaram (INR
10,500) by nearly 32%. The same case has been observed with Chromepet and Porur.
Though their average residential property values are identical, the average rental value of
Chromepet (INR 11,000) is higher than that of Porur (INR 7,500) by 32%.

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Locality Affordability to Rent Rank Affordability to Buy Rank
Adyar 12 12

Anna Nagar 10 11

Ashok Nagar 9 9

Chetpet 13 13

Chromepet 6 5

Kolathur 2 6

Medavakkam 4 4

Old Mahabalipuram Road 8 1

Perambur 7 8

Porur 1 3

Sholinganallur 5 7

T.Nagar 11 10

Tambaram 3 2

*On a scale of 1 to 7 with 1 being most affordable and 7 being least affordable based on the average property prices.

Table 2: Locality wise ranking based on the affordability to rent and buy

The above table shows the affordability to rent rank and the affordability to buy rank based
on the average property prices and average rental values across the thirteen major
localities of Chennai. Chetpet stands out to be the least affordable place in both scenarios.
Adyar is the second least affordable place. Ashok Nagar takes the 9th position in both the
rankings. Medavakkam takes the 4th place in both the rankings. This means that the
high/low property prices of the above 4 localities are translated to their relative rental
prices.

Old Mahabalipuram Road stands out as the most affordable place to buy and Porur stands
out as the most affordable place to rent. Tambaram takes the second place and Porur
takes the third place in the affordability to buy rankings. Kolathur is the second most
affordable place to rent and Tambaram is the third most affordable place to rent. The
property prices do not match the rental values in the above localities. Chromepet,
Sholinganallur, Perambur, Anna Nagar and T. Nagar also face the same scenario. This
signifies the fact that people of different localities have different expectations from their real
estate markets.

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4.3 Down payment

A critical decision in purchasing a home is the down payment required to make in order to
avail the facility of housing loan. It is often a substantial amount of money to be paid
upfront in order to own the house. While some of the professionals depend on their
extended family to provide for this amount, often they do need to save for it. Assuming a
20% of property price as the down payment and saving rate of 25% for a professional with a
gross income of 8 lakhs, based on the current average property prices, the time required to
save the corpus determines how sooner one can afford to buy a home.

No.of Years Required to save corpus for
downpayment of buying a house

Chetpet
Anna Nagar
Adyar
T. Nagar
Ashok Nagar
Locality

Perambur
Sholinganallur
Old Mahabalipuram Road
Chromepet
Kolathur
Porur
Tambaram
Medavakkam
12

Figure 4: No. of years required to save the corpus for down payment
across thirteen major localities of Chennai

The average property prices translate to the number of year's professional needs to save
for the required corpus for down payment. Based on the above stated assumption and
average property prices a professional can afford the down payment required to buy a
house in Medavakkam, Tambaram, Porur, Kolathur, Chromepet and Old Mahabalipuram
Road in 4 years. In order to own a house in Sholinganallur and Perambur a professional has
to save for 5 years. To buy a house in Ashok Nagar a professional will need to save for 7
years. In T. Nagar takes 8 years to save for the down payment required to buy a house. A
professional can afford the down payment required to buy a house in Anna Nagar and
Adyar in 9 years. In order to own a house in Chetpet a professional has to save for 10 years.
Figure 3 is in sync with the assigned affordability ranks for ownership.

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4.4 Area

The area of residential occupancy is an important aspect of life style. It determines the size
of the home that is provided for the family. Figure 4 compares the average number of sq ft
that can be bought for 1 lakh rupees across thirteen major localities in Chennai.

Average No.of sqft per INR 1lakh

Chetpet
Adyar
Anna Nagar
T. Nagar
Ashok Nagar
Locality

Perambur
Sholinganallur
Kolathur
Chromepet
Porur
Medavakkam
Tambaram

5 10 15 20 25 30 35

Figure 5: Average no. of sq ft per INR 1lakh across major localities of Chennai

Chetpet is the costliest locality offering a space of 6.85 sq ft per INR 1 lakh. Old
Mahabalipuram Road being the cheapest locality offers a space of 28.90 sq ft per INR 1
lakh. This means that for the same amount of living area, a professional who wants to buy a
house in Chetpet has to spend at least 4.5 times the amount he spends in Old
Mahabalipuram Road. Tambaram offers a space of 25 sq ft per INR 1 lakh. A professional
gets 23.81 sq ft of space for INR 1 lakh in Medavakkam and Porur. This means that a
professional investing INR 1 lakh in Medavakkam and Porur gets 4 times the space he
would get in Chetpet.

Chromepet and Kolathur offer a space of 23.65 sq ft and 23.33 sq ft per INR 1 lakh
respectively. A professional gets a space of 21.05 sq ft and 18.27 sq ft per INR 1 lakh in
Sholinganallur and Perambur respectively. Ashok Nagar and T. Nagar offer a living space
of 11.71 sq ft and 9.85 sq ft per INR 1 lakh respectively. Adyar and Anna Nagar are the
second and third costliest locality in Chennai. They offer a living space of 7.69 sq ft and 8.70
sq ft per INR 1 lakh respectively. Figure 4 attuned to the Affordability to Buy Ranking
mentioned above.

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4.5 Rent to Buy Ratio
The rent to buy ratio explains the additional monthly payments to be paid in case of
ownership compared to renting. The ratio also helps in understanding whether the
property prices are being translated to the rental value or not. The ratio is calculated
based on the average monthly cost of renting i.e. monthly rental value + monthly
maintenance and average monthly cost of ownership i.e. monthly EMI being paid in case
of owning the house + monthly Maintenance charges.
Locality Average monthly Average monthly Rent yo Buy Ra o Urgency to
out of pocket out of pocket buy rank
cost(Ren ng the cost(Owning the
house) (INR) house) (INR)

Adyar 26,000 11,5961.4881 22% 11

Anna Nagar 21,000 10,2696.701 20% 13

Ashok Nagar 20,000 76,534.11925 26% 8

Chetpet 31,000 13,0084.0647 24% 10

Chromepet 12,000 38,397.85639 31% 3

Kolathur 10,500 38,906.33989 27% 6

Medavakkam 11,500 38,141.40384 30% 4

Old Mahabalipuram Road 16,500 31,597.44221 52% 1

Perambur 12,000 49,403.20807 24% 9

Porur 8,500 38,141.40384 22% 12

Sholinganallur 11,500 43,005.1591 27% 7

T.Nagar 25,500 90,811.45175 28% 5

Tambaram 11,500 36,372.76556 32% 2

*On a scale of 1 to 7 based on the monthly cost of renting and monthly cost of buying with 1 means buy as soon as
possible and 7 means renting is better than buying.
Table 3:Rent to Buy ratio and Urgency to buy rank of thirteen major localities across Chennai
Anna Nagar has the least rent to buy ratio. This signiﬁes the fact that the higher property
prices of the locality are not being translated to the rental value in the locality. Renting is
cheaper than owning a house by at least 80%. Adyar and Porur also have low rent to buy
ratios. Renting is cheaper than buying by 78% in Adyar and Porur. Old Mahabalipuram
Road has high rent to buy ratio.

The urgency to buy rank assigned signiﬁes the fact that higher the rent to buy ratio, the
sooner a professional needs to buy a home in the locality. With a rent to buy ratio of 0.52
and the average monthly out of pocket cost of Owning house being moderate, rents
being relative higher Old Mahabalipuram Road ranks high in the urgency to buy ratio.
Tambaram and Chromepet are also ranked high on urgency to buy rank.

Medavakkam takes the 4th place in the urgency to buy rankings. T. Nagar takes the 5th
rank. Kolathur and Sholinganallur rank 6th and 7th respectively in the urgency to buy rank.
The 8th position in the urgency to buy rank is taken by Ashok Nagar. The 9th and 10th
position in the urgency to buy rank is taken by Perambur and Chetpet respectively.

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4.5 Break Even Horizon
Ignoring the price escalations of the residential property, one important question to be
answered is the breakeven horizon i.e. how long a new home buyer would have to own the
home to justify the decision of buying instead of renting in financial sense. Figure 5 shows the
graphs of the annual out pocket costs incurred in case of ownership and renting based on
the average property prices and average rental prices across the thirteen localities. The
annual out of pocket cost in case of renting include the annual amount paid towards the
rent, the annual maintenance charges paid and the amount of income tax being paid.
The annual out of pocket cost in case of ownership include the annual amount paid
towards the EMI payments of the house loan, annual maintenance and repair charges and
the amount of income tax being paid.

The income tax being paid is considered in calculations because most of the professionals
feel buying a home will do a world good for their tax savings. The idea is to compare the tax
benefits received in case of buying a home and renting the home. The payments made
towards the principal amount of the home loan are considered under section 80C. The
payments made towards interest on home loan are considered under section 24b. In case
of renting one can claim tax benefits under house rent allowance.

The provident fund received and required risk coverage for self and family also come
under section 80C. These items do fill up most of the 80C part. Out of the EMI payments
being made, in the initial years most of the amount accounts for interest payments rather
than the principal amount. By the time the payment towards principal increases, one can
also expect the salary of the professional to increase in turn increasing the Provident fund
being received. So, the tax benefit under section 80C in case of ownership doesn't actually
add much of advantage.

Though the tax benefits in case of ownership are higher during the initial years, renting the
same place gives better tax benefits over the next few years. The benefits of renting are
higher especially in the regions where the costs of ownership and renting don't match up
during the average loan tenure of 15 years. The breakeven year i.e. the year at which the
annual cost of owning house is equal to the annual cost of renting the same place is
calculated over the average loan tenure i.e. 15 years. The matchup of cost of ownership
and renting in Old Mahabalipuram Road is 9 years. The cost matchup in Tambaram,
Medavakkam and Chromepet happens in 15 years. It takes more than 15 years in T. Nagar,
Sholinganallur, Porur, Perambur, Kolathur, Chetpet, Ashok Nagar, Anna Nagar and Adyar.
The planned length of stay in the house becomes an important aspect in deciding whether
to buy or rent.

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Break Even Horizon

Tambaram Current Average stay 7 years

T.Nagar
Sholinganallur
Porur
Perambur
Medavakkam
Locality

Kolathur
Chromepet
Chetpet
Ashok Nagar
Anna Nagar
Adyar
2 4 6 8 10 12 14 16

Figure 6: Break Even Horizon for the thirteen major localities of Chennai

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5 ArthaYantra Buy vs Rent Score (ABRSTM)
The property price and rental value of the place speaks volumes about why one should rent
or buy the place. They have an impact on the amount of money being spent on the house
(be it rent or EMI), the tax savings being received and many other important things. But one
can't only rely on the rent to buy ratio and make the decision to buy without assessing his
affordability. Similarly a decision to buy a house just because one can afford the EMI is not
advisable. ArthaYantra came up with a unique scoring system called ArthaYantra Buy vs.
Rent Score (ABRS) which is an effort to seamlessly integrate the above two aspects. We
even added another layer of parameter, the rental value. So given a locality, based on the
income of the professional ABRS describes a suitable action from wide range of options
spanning from why one can't rent to why one has to rent though he/she can afford to buy to
why one should buy.

As a part of this research report we have considered the average property prices and
rental values of the localities and calculated the ABRS score across different salary ranges.
In this research, the scope of the scoring system is conﬁned to rental value and price of the
corresponding property of the same region. It can be extended to compare the rental
value of one region and property prices of a different region. This makes ABRS a powerful
tool to logically gauze the pros and cons of renting and buying a house.

Score Recommended Ac on
100 Buy (Rents are very high)

90 Buy (Rents are high)
87.5 Buy ( Rents are higher)

80 Can afford both ownership and Renting but because of low Rent to
Ownership Rent is recommended.

77.5 Buy/Neutral (Can afford both ownership and rent )

75 It is Advisable to buy but EMI can't be afforded. Have to Rent.

67.5 Rent/Neutral (Can afford both ownership and rent but rent/EMI ratio is low)
65 Rent (Rents are high but can't afford to buy)

55 Can afford to Rent but can't afford to Buy.

<50 Can't afford both ownership and renting.

Table 4: ArthaYantra Buy vs. Rent Score Explanation

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Gross Ady Anna Ashok Che Chro Kolat Meda Old Pera Porur Sholin T Tamb
Income/ ar Nagar Nagar tpet mep hur vakk Mahab mbur ganal Nag a
Cities et am alipura lur ar ram
m Road

8 Lakhs 55 55 55 30 65 55 65 75 55 55 55 55 65
10 Lakhs 55 55 55 55 65 55 65 87.5 55 55 55 55 77.5
12 Lakhs 55 55 55 55 77.5 67.5 77.5 100 55 67.5 67.5 55 77.5
15 Lakhs 55 55 55 55 90 80 90 100 67.5 80 67.5 55 90
20 Lakhs 55 55 55 55 90 80 90 100 80 80 80 55 90
25 Lakhs 55 55 67.5 55 90 80 90 100 80 80 80 55 90

Table 5: ArthaYantra Buy vs. Rent scores for different salary ranges across Thirteen major
Localities of Chennai.

Adyar : The low rental values compared to high property prices makes it a place where
renting can be easily afforded and the EMI associated with home loan in high. It is
advisable to rent for a professional with a salary range of 8 – 25 lakhs.

Anna Nagar : The score of 55 signifies that though the rents are high, it is advisable to rent
because the property prices are also high. The EMI payments to be made in case of
ownership are not affordable.

Ashok Nagar : The score of 55 for a professional with a salary range of 8-15 lakhs signifies that
the monthly cost of renting is cheaper than buying by more than 70%. The low rental prices
also meant that though the professional with a salary more than 16 lakhs can afford to buy
a house renting is a better option.

Chetpet : A professional with a salary of 8 lakhs cannot afford this locality. He will not be able
to pay the rents nor will he be able to afford the EMI payments. A professional with a salary
range of 9-25 lakhs can afford the rents in this locality but can't afford the EMI associated
with home loans.

Chromepet : The score of 65 for a professional with a salary range of 8-11 lakhs signifies that
though the rents are high, it is advisable to rent because the property prices are also high.
The EMI payments to be made in case of ownership are not affordable. A professional with
a salary range of 12-25 lakhs is advised to buy.

Kolathur : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even
with the high rents because he can't afford the EMI associated with a home loan. A
professional with a salary more than 12 lakhs can afford to buy a house, but because of the
low rents, renting is a better option.

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Medavakkam : The score of 65 for a professional with a salary range of 8-11 lakhs signifies
that though the rents are high, it is advisable to rent because the property prices are also
high. The EMI payments to be made in case of ownership are not affordable. A professional
with a salary range of 12-25 lakhs is advised to buy.

Old Mahabalipuram Road : A professional with a salary of 8 lakhs is better of renting. A
professional with a salary range of 9-11 lakhs falls in the neutral zone i.e. he can afford to buy
and it is advisable to buy but have to make few adjustments to the current lifestyle in order
to afford the additional amount for EMI payments. The professionals with a salary range of
12-25 lakhs are advised to buy.

Perambur : A professional with a salary range of 8-12 lakhs has an ABRS score of 55. The score
of 55 signifies that though the rents are high, it is advisable to rent because the property
prices are also high. The EMI payments to be made in case of ownership are not affordable.
A person with a salary range of 13-15 lakhs is in a neutral zone but is still advised to rent
because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as the
rents are high.

Porur : A professional with a salary range 8-11 lakhs is advised to rent. He should rent even
with the high rents because he can't afford the EMI associated with a home loan. A
professional with a salary more than 12 lakhs can afford to buy a house, but because of the
low rents, renting is a better option.

Sholinganallur : A professional with a salary range of 8-10 lakhs has an ABRS score of 55. The
score of 55 signifies that though the rents are high, it is advisable to rent because the
property prices are also high. The EMI payments to be made in case of ownership are not
affordable. A person with a salary range of 11-15 lakhs is in a neutral zone but is still advised
to rent because rents are cheaper. A person with a salary range of 16-25 lakhs should buy as
the rents are high.

T. Nagar : The score of 55 signifies that though the rents are high, it is advisable to rent
because the property prices are also high. The EMI payments to be made in case of
ownership are not affordable.

Tambaram : A professional with a salary range of 8 lakhs is better of renting. A professional
with a salary of 9-14 lakhs falls in the neutral zone i.e. he can afford to buy and it is advisable
to buy but have to make few adjustments to the current lifestyle in order to afford the
additional amount for EMI payments. The professionals with a salary range of more than 15
lakhs are advised to buy.

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19


6 Key Factors
Here are some important numbers to look at before making the decision:

Cities Adyar Anna Ashok Chet Chrom Kola Medav Old Mah Pera Porur Sholi T Tamb
Nagar Nagar pet epet thur akkam abalipur mbur ngana Nagar aram
am llur
Road
Initial
Corpus
required 2,176,500 2,300,000 1,708,300 2,919,400 845,800 857,300 840,000 692,000 1,094,700 840,000 950,000 2,031,200 800,000
for
owning* (INR)

No.of
Years to
save for 9 9 7 10 4 4 4 4 5 4 5 8 4
the
corpus
Average
No.of
sq.ft per 7.69 8.70 11.70 6.85 23.65 23.33 23.81 23.90 18.27 23.81 21.05 9.85 25.00
INR
1lakh
Initial
corpus
250,000 200,000 190,000 300,000 110,000 95,000 105,000 155,000 110,000 75,000 105,000 245,000 105,000
required
for
renting**
Average
out of
0.22 0.20 0.26 0.24 0.31 0.27 0.30 0.52 0.24 0.22 0.27 0.28 0.32
pocket
cost ***

Break
Even 15+ 15+ 15+ 15+ 15 15+ 15 9 15+ 15+ 15+ 15+ 15
year

*Ini al corpus required for owning = 20% of the Average property price (down payment for house loan)
**Ini al corpus required for ren ng= Amount equivalent to 10 months of rental value (Hyderabad which is 3 months)
*** Average out of pocket cost(Ren ng the house) / Average out of pocket cost (Owning the house)
The gross income of 8 lakhs per annum is considered.

Table 6: Other important numbers

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7 Conclusion
Based on the current real estate markets, Tambaram and Medavakkam are the best
places to own a house. The property prices and rental values in these three localities are
low, thus making them the most affordable places for a professional to rent or own a house.
The larger residential spaces offered by Old Mahabalipuram Road and Tambaram provide
a better lifestyle option. The real estate market of Old Mahabalipuram Road favors the
home owners because of its moderate property prices and high rental value. Though the
moderate property prices of Porur and Kolathur make a strong case of ownership for
professionals with higher salaries, the low rental values make renting a better option.
Chetpet is the least affordable locality for a professional because of its high property prices
and rental values.

The research addresses the fact that Buy vs. rent decision has a huge impact on the
personal finance of a professional. Buying a home is an integral part of every one's dream.
But a very calculated and merit based judgment is needed before taking the decision to
own the house. The comprehensive ArthaYantra Buy vs. Rent Score (ABRS) suggests the
decision a professional should take across the twelve major localities of Chennai based on
the current rental values, property prices and the salary. If a professional finds himself in the
rent zone as per the ABRS but still wants to buy a house, one has to make sure that their
Emotional Premium attached with buying a house is going to match the EMI premium
being paid.

8. Limitations and Concerns:
The data is related to following localities of Chennai:

Adyar, Anna Nagar, Ashok Nagar, Chetpet, Chromepet, Kolathur, Medavakkam, Old
Mahabalipuram Road, Perambur, Porur, Sholinganallur, T. Nagar and Tambaram.

The property tax to be paid is considered as 1.5% of the property value. The property tax
calculation reforms need some stringent reforms to regulate the process. In most places
the value is calculated based on the rental value. The rental values being shown in the
related local governing bodies website varies from the actual rental prices.

The tax benefits received under section 80C is considered as INR 1.2 lakh both in the case of
house ownership and renting.

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9. Appendix
FIGURES:

Figure 1: Graphical Representation of Buy Vs. Rent in Chennai

Figure 2: Historical values of National Housing Board India Residential Index (NHB Residex)

Figure 3: Average property price and rental values across thirteen major localities of Chennai

Figure 4: No. of years required to save the corpus for down payment across thirteen major
localities of Chennai

Figure 5: Average no. of sq ft per INR 1lakh across thirteen major localities of Chennai

Figure 6: Break even horizon for the thirteen major localities of Chennai

TABLE:

Table 1 : Factors associated with home ownership and renting

Table 2 : Locality wise ranking based on the affordability to rent and buy

Table 3 : Rent to Buy ratio and Urgency to buy rank of thirteen major localities across
Chennai

Table 4 : ArthaYantra Buy vs. Rent Score Explanation

Table 5 : ArthaYantra Buy vs. Rent scores for different salary ranges across thirteen
major Localities of Chennai.

Table 6 : Other important numbers

SOURCES:
 National Housing Board, India: www.nhb.org.in

 Jones Lang LaSalle: www.joneslanglasalle.co.in

 Makaan: www.makaan.com

 Magic Bricks: www.magicbricks.com

 Multiple Primary sources (100+)

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ArthaYantra is a young and innovative company started by a group of alumni of the Indian School of
Business (ISB) Hyderabad. It provides integrated personal finance services using its unique
proprietary framework, Personal Financial Lifecycle Management (PFLM)TM, which helps clients
achieve their financial goals. ArthaYantra's vision is to provide independent, high quality,
customized financial planning solutions and their efficient execution to individuals. It employs
proprietary financial models and enable investments through well balanced passive investment
strategies. ArthaYantra's clientele includes individuals from India, US, Europe and Middle East.

Our Mission
To positively impact the future of our customers & their families.

For more information on this report please contact ArthaYantra Corporation Pvt. Ltd.
visit us online: www.arthayantra.com or Write to : contactus@arthayantra.com

Website: www.arthayantra.com

: h p://twi er.com/arthayantra

: h p://www.facebook.com/arthayantra

:h p://www.linkedin.com/company/artha‐yantra

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ArthaYantra
A CFO FOR EVERYONE

Plot #319, Second Floor, Ayyappa Society, Madhapur, Hyderabad - 500081, AP, India.
Phone : +91- 040-66245874, Fax : +91-040-66245. www.arthayantra.com, contactus@arthayantra.com

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